<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
March 31, 1999
For the quarterly period ended:______________________________________________
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from
_____________________________ to ___________________________________
0-22752
Commission File Number: _____________________________________________________
MIKOHN GAMING CORPORATION
_____________________________________________________________________________
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Nevada 88-0218876
______________________________________________________________ ___________________________________
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number
</TABLE>
1045 Palms Airport Drive, P.O. Box 98686, Las Vegas, NV 89193-8686
______________________________________________________________________________
(Address of principal executive office and zip code)
(702) 896-3890
______________________________________________________________________________
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
_______ _______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as the latest practicable date:
10,722,757 April 21, 1999
_______________________________ as of _______________________________
(Amount Outstanding) (Date)
<PAGE>
MIKOHN GAMING CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Part I FINANCIAL INFORMATION ----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998 2
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
1
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands) March 31, December 31,
1999 1998
ASSETS ---- ----
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,715 $ 3,732
Accounts receivable, net 28,949 28,783
Installment sales receivable, current portion 1,040 1,387
Inventories, net 28,533 25,251
Prepaid expenses 5,567 4,611
Deferred tax asset 884 884
---------- ----------
Total current assets 66,688 64,648
Installment sales receivable, net of current portion 1,009 860
Property and equipment, net 22,425 22,625
Intangible assets 53,782 53,567
Other assets 7,929 8,453
Deferred tax asset current 3,079 3,079
---------- ----------
Total assets $ 154,912 $ 153,232
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt and notes payable $ 2,564 $ 2,122
Trade accounts payable 10,096 9,098
Customer deposits 5,089 4,675
Accrued and other current liabilities 5,700 5,729
---------- ----------
Total current liabilities 23,449 21,624
---------- ----------
Long-term debt, net of current portion 83,694 84,881
---------- ----------
Stockholders' equity:
Preferred stock, $.10 par value, 5,000 shares authorized,
none issued and outstanding
Common stock, $.10 par value, 20,000 shares authorized,
10,699 and 10,681 shares issued and outstanding 1,070 1,068
Additional paid-in capital 51,686 51,618
Foreign currency translation (957) (1,018)
Accumulated deficit (3,802) (4,713)
---------- ----------
Subtotal 47,997 46,955
Less treasury stock, 19 shares, at cost (228) (228)
---------- ----------
Total stockholders' equity 47,769 46,727
---------- ----------
Total liabilities and stockholders' equity $ 154,912 $ 153,232
========== ==========
See notes to condensed consolidated financial statements
</TABLE>
2
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1999 and 1998
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Sales $ 25,175 $ 21,779
Cost of sales 12,344 14,032
---------- -----------
Gross profit 12,831 7,747
Selling, general and administrative expenses 9,451 7,966
---------- -----------
Operating income (loss) 3,380 (219)
Interest expense (2,090) (824)
Other income 124 182
---------- -----------
Income (loss) before income tax (provision) benefit 1,414 (861)
Income tax (provision) benefit (503) 302
---------- -----------
Net income (loss) $ 911 $ (559)
========== ===========
Weighted average common shares:
Basic 10,675 10,306
========== ===========
Diluted 10,675 10,306
========== ===========
Earnings (loss) per share information:
Basic
$ 0.09 $ (0.05)
========== ===========
Diluted $ 0.09 $ (0.05)
========== ===========
See notes to condensed consolidated financial statements
</TABLE>
3
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(Amounts in thousands)
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 911 $ (559)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 1,148 896
Amortization 860 421
Provision for bad debts 14 91
Change in exchange rate variance 61 48
Changes in assets and liabilities:
Accounts receivable (180) 2,822
Installment sales receivable 198 96
Inventories (3,282) (2,735)
Prepaid expenses and other assets (432) (755)
Intangible assets (1,075) (275)
Trade accounts payable 998 (496)
Accrued and other current liabilities (29) (58)
Customer deposits 414 (594)
------------ -----------
Net cash used in operating activities (394) (1,098)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (400) (158)
Gaming equipment leased to others (554) (711)
Proceeds from sales of property and equipment 6 1
------------ -----------
Net cash used in investing activities (948) (868)
------------ -----------
Cash flows from financing activities:
Proceeds from long-term debt and notes payable 44
Principal payments on notes payable and long-term debt (789) (111)
Proceeds from sales of property and equipment 70 450
------------ -----------
Net cash provided by (used in) financing activities (675) 339
------------ ----- ------
(2,017) (1,627)
Cash and cash equivalents, beginning of period 3,732 4,896
------------ -----------
Cash and cash equivalents, end of period $ 1,715 $ 3,269
============ ===========
See notes to condensed consolidated financial statements
</TABLE>
4
<PAGE>
MIKOHN GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
These condensed unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
These statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K for the year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal accruals) necessary to
present fairly the financial position of the Company at March 31, 1999, the
results of its operations and cash flows for the three months ended March 31,
1999 and 1998. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for the entire
year.
All amounts reported in this section are rounded to the nearest thousand
unless otherwise stated.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133 Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under the standard,
entities are required to carry all derivative instruments in the statement of
financial position at fair value. SFAS 133 is effective beginning in the third
quarter of the Company's fiscal year ending December 31, 1999. The Company has
not yet determined the impact that SFAS 133 will have on its financial
statements but believes that any such impact will not be material.
NOTE 3 - ACQUISITION - PROGRESSIVE GAMES INC.
In September 1998, the Company acquired all of the outstanding stock of
Progressive Games, Inc. ("PGI") the developer of Caribbean Stud, for an
aggregate cash consideration of $35,847 as well as the two exclusive
distributors of Caribbean Stud in the major markets of Mississippi and
Louisiana, P&S Leasing Corporation, Inc. and P&S Leasing LLC, collectively
referred to as P&S Leasing for an aggregate cash consideration of $3,300. All
of the outstanding stock of PGI was acquired from Donald W. Jones. In addition
to these proprietary games, the assets of PGI include equipment and other
physical property used in the manufacture and
5
<PAGE>
distribution of these games. All of the outstanding stock of P&S Leasing was
owned by Bertrand F. Hull and William S. Parrish.
The purchase method of accounting for business combinations was applied to the
PGI and P&S Leasing acquisitions. Accordingly, the total purchase prices of
$35,847 and $3,300 for PGI and P&S Leasing respectively were allocated based on
their fair values of all assets and liabilities at the date of acquisition. The
Company, with the exceptions noted below, does not anticipate any material
adjustments in 1999. The excess of the purchase price over the net assets
acquired in these acquisitions totaled $33,674. This goodwill amount will be
amortized in a straight line manner over a 40 year period These acquisitions
were financed with funds from the private placement of long-term debt the
Company consummated in September 1998. Both the acquisitions and the private
placement of long-term debt were simultaneously occurring transactions. The
results of both PGI and P&S Leasing since the acquisition are included in the
Condensed Consolidated Statement of Operations for the quarter ended March 31,
1999. Proforma condensed summary information for the periods March 31, 1999 and
1998 as if the acquisitions of PGI and P&S Leasing occurred on January 1, 1998
follows:
<TABLE>
<CAPTION>
March 31,
--------
1999 1998
---- ----
<S> <C> <C>
Sales $ 25,175 $ 25,533
========= =========
Net income $ 911 $ (202)
========= =========
EPS (Basic and diluted) $ 0.09 $ (0.02)
========= =========
</TABLE>
Upon the acquisition of PGI in September 1998, the Company also acquired a
number of pending lawsuits charging infringement of various patents owned by
PGI. The largest of these lawsuits involves the "Let It Ride - Tournament" game
and the "Let It Ride - Bonus" game (collectively the "LIRB Game") marketed by
Shuffle Master Gaming (the "Shuffle Master Lawsuit"). The Shuffle Master
Lawsuit includes a number of separate lawsuits filed by PGI against Shuffle
Master and numerous casinos offering the LIRB Game in Connecticut, Indiana,
Illinois, Mississippi, Missouri, Nevada and New Jersey all of which have been
consolidated for pre-trial purposes by the Judicial Panel on Multi-District
Litigation before the United States District Court in Mississippi. Prior to the
consolidation of one of the lawsuits brought in New Jersey, the United States
District Court in New Jersey entered a preliminary injunction enjoining the
operation of the LIRB Game. That injunction is the subject of a motion to
vacate pending before the Mississippi District Court. In the Shuffle Master
Lawsuit, PGI has claimed that the LIRB Game infringes seven separate patents
owned by PGI. Shuffle Master has raised defenses of non-infringement, patent
invalidity and inequitable conduct and asserted counterclaims alleging antitrust
violations and unfair competition. Discovery is currently stayed; no trial date
has been set. Management believes that the Company will prevail in the Shuffle
Master lawsuit.
As a result of the PGI acquisition, the Company has exposure to potential
additional international withholding taxes on payments remitted to the U.S. to
the previous owner of PGI, estimated at $2,000. The Company has provided to the
former owner a Power of Attorney with which to handle the withholding tax
issues. To the extent that the Company does not prevail, any payments made
would be charged back to the previous owner under the terms of the Stock
6
<PAGE>
Purchase Agreement for the acquisition of Progressive Games, Inc. To the extent
that the Company is ultimately responsible for the payment of tax, the amounts
would be capitalized as part of goodwill on the PGI acquisition. The Company has
one year from date of acquisition in which to effect a change in the amount of
goodwill. Any changes made after the one year period must be expensed. It is
Management's intention to resolve this uncertainty and effect all required
adjustments prior to the end of the one year window.
NOTE 4 - SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 established standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also established standards for
related disclosures about products and services and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
group is the Operations Committee, which is comprised of the Chairman and each
of the Executive Vice-Presidents of Finance, Operations and Sales / Product
Development.
The Company operates in three business segments: Signs, Gaming Products and
Gaming Operations. The Signs segment designs, manufactures and installs interior
signage and displays. It also, designs, manufactures, installs and maintains
exterior signage. The Gaming Products segment includes manufacturing of
progressive jackpot systems; it develops, markets and installs automated data
collection systems for player tracking and accounting for gaming machines. It
also manufactures and sells oversized gaming machines and touch-screen multi-
game video machines. The Gaming Operations segment leases, licenses and places
proprietary games, machines and tables on lease, structured participation or
license agreement. It owns or licenses the rights to several categories of
proprietary games, including progressive jackpot table games, coin-push gaming
machines, oversized gaming machines and touch-screen multi-game video machines.
These table games and gaming machines produce recurring revenue on a lease,
participation or licensing arrangement. The Company does not allocate corporate
expenses to the business segments.
Business segment Information for the quarters ended March 31, 1999 and 1998
consist of:
<TABLE>
<CAPTION>
March 31,
---------
Business segments: 1999 1998
- ------------------ ---- ----
<S> <C> <C>
Sales:
Signs $ 11,951 $ 12,466
Gaming products 7,459 7,845
Gaming operations 5,765 1,468
-------- --------
$ 25,175 $ 21,779
======== ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
March 31,
---------
1999 1998
---- ----
Business segments
- -----------------
<S> <C> <C>
Gross profit:
Signs $ 4,484 $ 3,031
Gaming products 3,229 3,512
Gaming operations 5,118 1,204
--------- ---------
$ 12,831 $ 7,747
--------- ---------
Operating income:
Signs $ 3,250 $ 2,095
Gaming products 2,346 2,379
Gaming operations 3,984 791
Corporate (6,200) (5,484)
--------- ---------
$ 3,380 $ (219)
========= =========
Net income before taxes:
Signs $ 2,490 $ 1,641
Gaming products 1,616 2,271
Gaming operations 3,469 574
Corporate (6,161) (5,347)
--------- ---------
$ 1,414 $ (861)
========= =========
March 31,
---------
1999 1998
Geographic Operations ---- ----
- ---------------------
<S> <C> <C>
Sales:
North America $ 20,826 $ 17,576
Australia 1,944 1,843
Europe 1,932 1,878
South America 473 482
--------- ---------
$ 25,175 $ 21,779
========= =========
Gross profit:
North America $ 11,581 $ 6,420
Australia 573 609
Europe 433 482
South America 244 236
--------- ---------
$ 12,831 $ 7,747
========= =========
Operating income:
North America $ 3,197 (756)
Australia 75 264
Europe 15 146
South America 93 127
--------- ---------
$ 3,380 $ (219)
========= =========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Net income before taxes
North America $ 1,529 $ (1,309)
Australia (83) 244
Europe (85) 106
South America 53 98
--------- ---------
$ 1,414 $ (861)
========= =========
</TABLE>
9
<PAGE>
MIKOHN GAMING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTICE
This report contains forward-looking statements in which management shares its
knowledge and judgment about factors that it believes may materially affect
Company performance in the future. Terms expressing future expectations,
enthusiasm or caution about future potential and anticipated growth in sales,
revenues and earnings and like expressions typically identify such statements.
All forward-looking statements, although made in good faith, are subject to
the uncertainties inherent in predicting the future. They are necessarily
speculative, and unforeseen factors such as unusual production problems,
competitive pressures, failure to gain the acceptance of regulatory authorities
and other adverse government action, customer resistance and general
deterioration in economic conditions may cause results to be materially poorer
than any that may be projected. Forward-looking statements speak only as of the
date they are made, and readers are warned that the Company undertakes no
obligation to update or revise such statements to reflect new circumstances or
unanticipated events as they occur.
Readers are urged to carefully review and consider disclosures made by the
Company in this and other reports that discuss factors germane to the Company's
business. See particularly the Company's reports on Forms 10-K, 10-Q and 8-K
filed with the Securities and Exchange Commission.
CHANGES IN REPORTING
As the Company has realigned the reporting of its business units to conform
with revised FASB reporting requirements, certain items of prior year revenue
and expense have been reclassified to follow the Company's current reporting
practice. Additionally, all intercompany activity has been eliminated. Amounts
reported in 1998 have been adjusted to be consistent with the Company's current
reporting of intercompany activity. All amounts reported in this section are
rounded to the nearest thousand unless otherwise stated. All percentages
reported are based on those rounded numbers.
10
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
- ------------------------------------------
SALES
<TABLE>
<CAPTION>
Change
---------------------------
Business Segment 1999 1998 Amount % Comment
---------------- ---- ---- ------ -- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Signs $ 11,951 $ 12,466 $ (515) -4.1% 1
Gaming products 7,459 7,845 (386) -4.9% 2
Gaming operations 5,765 1,468 4,297 292.7% 3
------------- ------------- --------------
$ 25,175 $ 21,779 $ 3,396 15.6%
============= ============= ==============
Percentage to total revenues:
Signs 47.5% 57.2%
Gaming products 29.6% 36.0%
Gaming operations 22.9% 6.8%
------------ -------------
100.0% 100.0%
============ =============
</TABLE>
1. The decrease of $515 is due primarily to: (i) a decrease of $972 in exterior
sign sales, (ii) an offsetting increase of $414 in domestic interior sign
and service sales and (iii) an offsetting increase of $125 in sales by our
international subsidiaries. The decrease in exterior sign sales is due to a
fewer number of exterior sign projects during this most recent period. The
increase in interior sign revenue is due primarily to the Beau Rivage
opening in Mississippi and the Mandalay Bay opening in Las Vegas. No such
large property openings occurred during the same period of the prior year.
2 The decrease of $386 is due primarily to: (i) a decrease of $120 in sales by
our international subsidiaries of electronic system products sales, (ii) a
decrease of $160 in sales by our international subsidiaries of electronic
display product sales, (iii) an offsetting increase of $431 in domestic
systems product sales and (iv) a decrease of $405 in slot machine game
sales. The decrease in international electronic display sales is due to a
lower level of activity in Europe and Australia during this most recent
period. The Australian sales are down due to a delay in shipments caused by
regulatory issues that have required development of a new controller
product. This has led customers to delay orders until a new Mikohn
controller is released for sale. These delayed sales should contribute to
revenue increases in the last half of 1999.
3 The increase of $4,297 is due primarily to: (i) an increase of $653 in
recurring revenue from the Company's MoneyTime(TM) product, (ii) an
offsetting decrease of $198 in recurring revenue from the Company's
MiniBertha(TM) and Flip-It(TM) slot machine route and (iii) an increase of
$3,664 in recurring revenue from the Company's table game route. The
increase in MoneyTime revenue is due to the larger number of slot machines
under license agreements in the most recent period. The decrease in
MiniBertha and Flip-It slot route revenue is primarily due to the smaller
number of games on the route during the most recent period. The
11
<PAGE>
increase in the table game revenue is primarily due to the acquisitions of
PGI and P&S Leasing on September 2, 1998, as well as the Company's effort to
expand the number of table games under license agreements since the
acquisition of these firms. The table game revenue acquired as a result of
these acquisitions was not included in the Company's reported revenue for
the three months ended March 31, 1998.
As of March 31, 1999, the Company had a backlog of orders believed to be firm
of $19,773. As of March 31, 1998 and December 31, 1998, the Company's backlogs
were $19,211 and $21,960, respectively. Management expects that the backlog of
orders at March 31, 1999, will be filled within 120 days.
GROSS PROFIT
<TABLE>
<CAPTION>
Change
--------------------------------
Business Segment 1999 1998 Amount % Comment
---------------- ---- ---- ------ -- -------
<S> <C> <C> <C> <C> <C>
Gross profit:
Signs $ 4,484 $ 3,031 $ 1,453 47.9% 1
Gaming products 3,229 3,512 (283) (8.1%)
Gaming operations 5,118 1,204 3,914 325.1% 2
--------- --------- ---------
Total $ 12,831 $ 7,747 $ 5,084 65.6%
========= ========= =========
Gross profit margin:
Signs 37.5% 24.3%
Gaming products 43.3% 44.8%
Gaming operations 88.8% 82.0%
Total 51.0% 35.6%
</TABLE>
1. The increase of $1,453 is primarily due to: (i) an increase in domestic
interior signs gross profit of $915 and (ii) an increase in sign service and
maintenance gross profit of $592. The increase in domestic interior sign
gross profit is primarily due to improvements in operating efficiencies,
manufacturing processes and lack of any major low profit margin jobs during
the quarter. The increase in sign service and maintenance gross profit is
due to improvements in the operations of the service division as well as
increased billing rates. These two factors also explain the increase in the
gross profit margin in the most recent period.
2 The increase of $3,914 is primarily due to: (i) an increase in MoneyTime
gross profit of $647, (ii) a decrease in MiniBertha and Flip-It route gross
profit of $287 and (iii) an increase in table game route gross profit of
$3,377. The increase in MoneyTime gross profit is due primarily to the
greater number of slot machines under license agreements in the most current
period. The decrease in MiniBertha and Flip-It slot route gross profit is
due primarily to the fewer number of these slot machines on route during the
most current period. The increase in table game gross profit is primarily
due to: (i) table games acquired as part of the acquisitions of PGI and P&S
Leasing and (ii) the Company's effort, since the acquisitions, to increase
the number of table games on route. These acquired table games were not
included in the amounts shown for the three months ended March 31, 1998.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended March
31, 1999 increased by 19% or $1,485, from $7,966 for the three months ended
March 31, 1998 to $9,451 for the three months ended March 31, 1999. The
significant factors affecting this increase are as follows:
Selling, product development and marketing expenses for the three months ended
March 31, 1999 increased by 10% or $317, from $3,063 for the three months ended
March 31, 1998 to $3,380 for the three months ended December 31, 1999. This
increase was due primarily to the implementation of a product development and
management unit within the Company to bring new products to market on a more
timely basis.
General and administrative expenses for the three months ended March 31, 1999
increased by 10% or $256, from $2,445 for the three months ended March 31, 1998
to $2,701 for the three months ended March 31, 1999. This increase is due
primarily to the additional administrative expenses of PGI and P&S Leasing.
Research and development expenses for the three months ended March 31, 1999
increased by 19% or $221, from $1,140 for the three months ended March 31, 1998
to $1,361 for the three months ended March 31, 1999. This increase is due
primarily to: (i) increased expenses for the development of new slot machine
bonusing products and table games and (ii) increased expenses related to the
development of Company's table and slot systems product lines.
For the three months ended March 31, 1999, the Company capitalized certain
costs related to software development of new products that have achieved
technological feasibility. Capitalized software development costs for the three
months ended March 31, 1999 decreased by 57% or $101, from $177 for the three
months ended March 31, 1998 to $76 for the three months ended March 31, 1999.
For the three months ended March 31, 1999, the Company recognized amortization
expense related to these costs of $23. At March 31, 1999 the net book value of
capitalized software development costs totaled $1,106.
Depreciation expense for the three months ended March 31, 1999 increased by
28% or $252, from $896 for the three months ended March 31, 1998 to $1,148 for
the three months ended March 31, 1999. This increase is due primarily to: (i)
increased depreciation associated with the Company's capitalized recurring
revenue games, including MoneyTime and (ii) increased depreciation related to
the acquisition of the assets of PGI.
Amortization expense for the three months ended March 31, 1999 increased by
104% or $439, from $421 for the three months ended March 31, 1998 to $860 for
the three months ended March 31, 1999. This increase is primarily due to: (i)
increased goodwill amortization related to the acquisitions of PGI and P&S
Leasing and (ii) the amortization of the capitalized patent costs acquired as
part of the acquisition of PGI.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 1999 increased by 154%
or $1,266, from $824 for the three months ended March 31, 1998 to $2,090 for the
three months ended March 31, 1999. This increase is due to the increased debt
related to the acquisitions of PGI and
13
<PAGE>
P&S Leasing. The average interest rate on outstanding debt for the three
month period ended March 31, 1999 was 9.2% as compared to 9.9% for the three
months ended March 31, 1998.
OTHER INCOME
Other income for the three months ended March 31, 1999 decreased by 34% or
$11, from $32 for the three months ended March 31, 1998 to $21 for the three
months ended March 31, 1999.
Interest income for the three months ended March 31, 1999 decreased by 31% or
$47, from $150 for the three months ended March 31, 1998 to $103 for the three
months ended March 31, 1999. This decrease is due primarily to lower interest
income as a result of lower cash or cash equivalents held during the most recent
period.
INCOME TAX (PROVISION) BENEFIT
Income taxes for the three months ended March 31, 1999 equaled a provision of
$503 or an effective tax rate of 36% as compared to a tax benefit of $302 and an
effective tax rate of 35% for the three months ended March 31, 1998.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings per share for the three months ended March 31, 1999
were $0.09 on both basic and diluted weighted average common shares outstanding
of 10,675. For the three months ended March 31, 1998 basic and diluted earnings
(loss) per share were ($0.05) on both basic and diluted weighted average common
shares outstanding of 10,306.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999 the Company had net income of $911
as compared to a net loss of $559 for the three months ended March 31, 1998.
Net cash used in operating activities for the current period was $394. The
major items reflected in this use of cash were: (i) an increase in inventories
of $3,282, (ii) an increase in intangible assets of $1,075 and (iii) an increase
in prepaid expenses and other assets of $432. Offsetting these uses of cash,
trade accounts payable increased by $998 and customer deposits increased by
$414. Net cash used in investing activities and financing activities amounted
to $948 and $675, respectively.
The increase in inventory levels during the most recent period is attributable
to the Company's effort to manufacture games that will be capitalized as gaming
equipment leased to customers when placed at customer sites under lease or
license agreements.
Cash balances as of March 31, 1999 were $1,715, down from $3,732 at December
31, 1998. The Company expects that cash provided from its operating activities,
as well as its available revolving line of credit and its ability to increase
the revolving line of credit by $5,000, will be sufficient to meet its
requirements during the remainder of 1999.
14
<PAGE>
On September 2, 1998 the Company completed the closing of an Amended and
Restated Credit Agreement. This agreement was funded by First Source LLP and a
consortium of lenders and consisted of a $13,500 fixed rate term loan bearing
interest at 10.25% per annum; a $67,500 variable rate term loan bearing interest
at either prime plus 225 basis points or LIBOR plus 325 basis points; and a
$5,000 variable rate revolving line of credit which bears interest at either
prime plus 175 basis points or LIBOR plus 275 basis points. As part of this
Amended and Restated Credit Agreement the Company has agreed: (i) to maintain
certain financial ratios, (ii) to comply with certain financial covenants, (iii)
not to allow the incurrence of additional debt or the payment of cash dividends,
unless expressly permitted by the Amended and Restated Credit Agreement and (iv)
to adhere to a number of other financial restrictions. First Source Financial
LLP is acting as the lenders' agent for this transaction. The term loans begin
maturing in April 2002 with equal 16.7% principal repayments due every six
months until complete maturity on October 24, 2004. The proceeds of this
borrowing were used to acquire the stock of PGI and P&S Leasing as well as
provide additional working capital. The Company has been in compliance with the
covenants and terms of the Amended and Restated Credit Agreement and management
believes the Company will remain in compliance. As of the date of this filing,
the Company has borrowed $2,000 of the funds available under the revolving line
of credit and has $3,000 available under this line. The Company has the ability
to increase the revolving line of credit by another $5,000.
YEAR 2000
The approach of the year 2000 poses problems for businesses utilizing
computers or embedded technology (such as micro controllers) in their
operations. Many computer programs and systems operating machinery and
equipment are date sensitive and will only recognize the last two digits of the
year. Such programs and systems may recognize the year 2000 as the year 1900 or
not at all. This problem is commonly described as the "Year 2000 Issue" or
"Y2K" and it has the potential to produce errors in information and system
failures. Assessments of the potential cost and effect of the Year 2000 Issue
vary significantly among businesses, and it is extremely difficult to predict
the actual impact. Recognizing this uncertainty, management has made and is
continually updating its comprehensive assessment of the Company's exposure to
the Year 2000 Issue and what will be required to ensure that the Company is Year
2000 compliant.
The Company manufactures and sells a number of products that include software
components. As part of its overall assessment of the Year 2000 Issue, the
Company has identified products or product versions that will require
modification or other remedial action and has developed and is implementing a
plan to facilitate this effort. The corrective action plan includes
modifications, upgrades or replacements of non-compliant software systems. The
Company anticipates that the required modifications, upgrades and replacements
of software systems will most likely be completed and approved by the various
gaming jurisdictions during 1999 and that there will be enough time for
additional testing, revisions and installations before year end.
The Company believes that it's corrective action plan is adequate and
realistic. Nevertheless, if one or more of the Company's systems has been
overlooked or if implementation of the corrective action plan fails to achieve
Year 2000 compliance for one or more software systems,
15
<PAGE>
there could be a material adverse impact on the Company's business operations
and/or financial performance.
The Year 2000 readiness of the Company's customers varies. In light of this,
the Company is encouraging its customers to evaluate their own system
requirements and needs. Efforts by customers to address the Year 2000 Issue may
affect the demand for certain of the Company's products and services. However,
to date the Company is unable to determine what impact, if any, there will be on
its revenue.
The Company is also in the process of assessing the Year 2000 readiness of its
key suppliers and business partners. The Year 2000 Issue presents a number of
other risks and uncertainties that could impact the Company, such as the ability
of certain governments and gaming commissions of the various jurisdictions where
the Company conducts business to timely act on updates to its software that
require regulatory approval before the Company's customers can lawfully use
them.
The primary computer programs utilized in the Company's operations and
financial reporting systems have been acquired from independent software
vendors. All of these vendors have been formally contacted to determine whether
their systems are Year 2000 compliant. To the extent they are not, timelines
have been established as to when the Company will receive the required upgrades
to assure that these systems will be Year 2000 compliant. Maintenance or
modification of existing software is expensed as incurred, while the purchase of
new software will be capitalized and amortized over the software's useful life.
The Company does not expect to incur costs in connection with the Year 2000
Issue that would have a material impact on operations. Although the Company
believes that its computer software systems will be Year 2000 compliant, no
assurance can be given that all systems provided by software vendors will have
all modifications necessary to make them Year 2000 compliant on a timely basis.
The Year 2000 Issue has an impact on non-information technology systems (i.e.,
embedded data) such as the Company's manufacturing systems and physical
facilities including, but not limited to, security systems and utilities. The
non-information technology system issues are more difficult to identify and
resolve. The Company is actively identifying non-technology Year 2000 Issues
concerning its products and services, as well as those that impact its physical
facility locations. As the various non-information technology systems are
identified, management is formulating action plans to ensure minimal disruption
of its business processes. Although management believes that its efforts will be
successful and the costs will not be material to its financial condition and
results of operations, it recognizes that any failure or delay could cause a
disruption in its business and might have a significant financial impact.
The Company has estimated total costs to achieve Year 2000 compliance on its
internal software and systems to be $300. The Company expects to capitalize
costs that are planned system upgrades and expense costs that are incurred only
to make the software Y2K compliant. It has incurred costs of approximately $200
to date, $175 of which was capitalized as part of the Company's internally used
software upgrade program, the remaining $25 was previously expensed. The
additional $100 the Company anticipates incurring will be capitalized as part of
planned system upgrades.
The Company's current cost estimate for efforts associated with achieving
compliance with the products that it manufactures, markets, distributes or
otherwise sells to its customers is
16
<PAGE>
$630. Of this amount, $280 is expected to be capitalized in accordance with the
Company's capitalization policy and these costs are related to the Company's
Caribbean Stud product line. This capitalization policy properly matches the
Company's monthly stream of revenue to a depreciated asset expense over the
useful life of the asset. The costs associated with the Year 2000 Issue upgrade
of the Company's Caribbean Stud product line will be charged back to the
previous owner under the terms and conditions of the Stock Purchase Agreement
between Mikohn and PGI. To the extent the recovery of these amounts is not
forthcoming, the Company will charge the cost to the goodwill account establish
during the acquisition of PGI. The Company has one year from date of acquisition
in which to effect a change in the amount of goodwill. Any changes made after
the one year period must be expensed. It is Management's intention to resolve
this uncertainty and effect all required adjustments prior to the end of the one
year window. The remaining $350 of costs are related to the Company's CasinoLink
product line and will be expensed as they are incurred.
The Company expects to fund these Year 2000 Issue costs from its operating
cash flows and does not believe the Year 2000 Issue will have a material impact
on the Company's cash resources or liquidity.
To minimize any potential unforeseen impact, the Company is in the process of
developing a contingency plan. Management will continue to formulate additional
plans as necessary, based upon the results of current research and
investigation. It is the Company's intention to ensure that it has adequate
resources and sources of supplies to minimize any potential business
interruptions. Although the Company believes the Year 2000 Issue described above
will not materially affect its consolidated financial position or results of
operations, it acknowledges that it cannot state with certainty that the Year
2000 Issues will not, in some manner now unforeseen, have an adverse impact upon
it.
17
<PAGE>
MIKOHN GAMING CORPORATION
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
A. Exhibits:
27 Financial Data Schedule
B. Reports on Form 8-K:
None
18
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
MIKOHN GAMING CORPORATION, Registrant
BY: /S/ Donald W. Stevens
_________________________________________
Donald W. Stevens, Executive Vice
President, Treasurer, Principal
Financial Officer
Dated: April 29, 1999
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,696
<SECURITIES> 19
<RECEIVABLES> 29,882
<ALLOWANCES> 933
<INVENTORY> 28,533
<CURRENT-ASSETS> 66,688
<PP&E> 36,384
<DEPRECIATION> 13,959
<TOTAL-ASSETS> 154,912
<CURRENT-LIABILITIES> 23,449
<BONDS> 86,258
0
0
<COMMON> 1,070
<OTHER-SE> 46,699
<TOTAL-LIABILITY-AND-EQUITY> 154,912
<SALES> 25,175
<TOTAL-REVENUES> 25,175
<CGS> 12,344
<TOTAL-COSTS> 21,657
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 2,090
<INCOME-PRETAX> 1,414
<INCOME-TAX> 503
<INCOME-CONTINUING> 911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 911
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
